Adnan Adams Mohammed
The discussions around the introduction of Islamic financing models to augment Ghana’s access to needed funding to address pressing developmental needs of the country has lingered over decades.
In spite, the financial laws of the country permitting the country to explore the vast market of Islamic finance products which have been touted as the most sustainable and prudent sources of developmental funding, the regulatory framework is not attended to, thereby curtailing all efforts by Ghanaians to exploit the market.
Over the years, many finance industry experts have consistently highlighted Islamic banking as a critical tool for addressing Ghana’s ongoing economic and financial challenges. They emphasize the need for innovative financing options to support Ghana’s development amidst budget constraints and rising debt burdens. However, President John Dramani Mahama recently hinted at the adoption of Islamic banking during the National Thanksgiving Prayers with Muslims at the National Mosque. This came as an assuring moment to the finance industry.
“For some time, Ghana will be working to pay interests, and the budget cannot accommodate significant economic expansion on the front of infrastructure. This is why alternative sources of financing, such as Islamic banking, are crucial”, Renowned economist and Dean of the University of Cape Coast Business School, Professor John Gartchie Gatsi, said in an interview last week.
Prof. Gatsi emphasized that Ghana must explore inclusive and sustainable financing options to navigate its economic challenges. Islamic banking, he argued, provides a viable alternative that aligns with the country’s development goals while easing fiscal pressures.
“By embracing this innovative financing model, Ghana can diversify its funding sources, support critical infrastructure projects, create jobs, and reduce the public debt burden”. “This is the way forward for sustainable economic growth,” Prof. Gatsi noted, highlighting the benefits of adopting Islamic banking, which offers unique financing mechanisms like sukuk (Islamic bonds) and access to the Islamic Development Bank.
Analyzing Ghana’s budget structure, Prof. Gatsi noted that 35.5% is allocated to debt servicing, 24% to compensation, 5.5% to capital expenditure, and 5.4% to goods and services. This leaves minimal room for infrastructure development.
“When structured well, Islamic banking promotes public-private partnerships with a Special Purpose Vehicle (SPV) to ensure that project loans are repaid without burdening the public purse,” Prof. Gatsi elaborated.
Also, a Chartered Accountant and an Islamic finance expert, Yusif Geoffrey, has indicated that, among the innovative financing solutions Ghana can adopt to bridge the financing gap, especially for the country’s infrastructure is Sukuk.
Sukuk is an Islamic financial instrument similar to conventional bonds; this instrument has been used as an avenue for unlocking much-needed funds for infrastructure projects by both developed and developing economies across the globe.
The Infrastructure Challenge in Ghana
Ghana’s infrastructure deficit is a critical barrier to economic growth, affecting transportation, energy, and healthcare sectors. There is a huge infrastructure gap in several sectors of the economy, including energy, education, affordable housing, health, transport, and recreation.
The World Bank estimated that Ghana would require $2.3 billion annually for infrastructure financing. The critical question is how Ghana can sustainably finance this necessary expenditure without worsening its debt burden.
Sukuk, known as Islamic Bonds, is the golden key to Ghana’s infrastructure financing needs. Its asset-backed feature ensures that the financial arrangement does not create an additional debt burden for the country.
It signifies ownership in a tangible asset or its usufruct, which refers to the rights to the earnings or benefits derived from that asset. Essentially, sukuk represents a form of investment that combines the principles of Islamic finance with the tangible qualities of underlying assets. It allows investors to share in the returns generated by the asset while ensuring compliance with Islamic Jurisprudence.
Unlike traditional bonds that incur interest, sukuk involves asset-backed financing, where investors receive returns based on the performance of underlying assets. This structure aligns with ethical finance principles and provides a unique opportunity for governments and businesses to diversify their funding sources.
Global Sukuk Market
The global sukuk market has made notable strides over the past decade, showcasing its strength and resilience despite various global financial challenges, such as the COVID-19 pandemic. As highlighted in the Islamic Financial Services Board (IFSB) Stability Report 2023, the Islamic finance industry is projected to reach a remarkable USD 3.38 trillion this year. This growth underlines the significance of sukuk as a vital capital market instrument within the Islamic Capital Market.
The recent International Islamic Financial Market (IIFM) Sukuk report reveals that global sukuk issuances increased by around 16% p.a., or USD 212 billion, in 2023 compared to USD 182.7 billion in 2022. Such figures reflect the increasing recognition and adoption of sukuk as an innovative financing tool that has gained prominence in financing Infrastructure projects across the globe.
Benefits of Sukuk for Ghana
Alternative Funding Source: Sukuk can provide Ghana access to a broader pool of investors, including those interested in Sharia-compliant investments. This diversification will enhance financial resilience and reduce reliance on traditional debt instruments such as the Euro and other domestic bonds. The absence of interest in the structuring of Sukuk makes it unique and attractive to investors from the Islamic Finance market, which is expected to reach $5.96 trillion by 2026.
Economic Growth: By financing key infrastructure projects through Sukuk, the government can stimulate economic activity, create jobs, and improve public services. Infrastructure development is closely linked to GDP growth and overall national development. Ghana can follow African Countries like Nigeria, South Africa and the United Kingdom that have issued Sukuk to finance various infrastructure projects.
Financial Inclusion: Issuing Sukuk can foster financial inclusion by engaging a broader population segment in investment opportunities. This approach can empower individuals and businesses that prefer ethical financial products. In 2024, the Ministry of Finance reported in the National Financial Inclusion and Development Strategy that about 60% of Ghanaians are excluded from the formal financial system.
Public-Private Partnerships (PPP): Sukuk can facilitate PPPs by providing a structured financing mechanism that aligns the interests of both public entities and private investors. This collaboration can lead to more efficient project execution and risk-sharing. For example, the Islamic Development Bank financed a Hydro Agricultural Development Project in Cote d’Ivoire and Maternal and neonatal healthcare services in Mauritania using Islamic Financial Instruments. This is mainly because Islamic Finance is with partnership financing models.
What needs to be done
Apparently, Mr Geoffrey has indicated that, despite its potential, several challenges may hinder the successful implementation of Sukuk in Ghana, therefore, he proposes that to facilitate its adoption; policymakers, investors, and the general public need to be more aware and understand Sukuk.
A robust regulatory framework supporting Sukuk issuance is vital. The Banks and Specialised Deposit-taking Act 930 Institutions ACT, 2016, Securities Industry 2016 (ACT 929), and other related laws must be reviewed to create an environment that will attract investors to enter this financial market.
Ghana must apply for membership in the Organization of Islamic Countries (OIC), the mother Institution of the Islamic Development Bank (IsDB). These are multilateral financial institutions like the World Bank and the International Monitoring Fund. It is rife to point out that Ghana will not automatically be classified as an Islamic country if it joins the IsDB. Yet, it can access a large pool of non-interest-bearing financing tools to finance the much-needed infrastructure to fill the deficit.
